What the Federal Reserve says and does is very important to the bond index, as it makes monetary policy, guides future interest-rate expectations and sets the tone for inflation and the health of the U.S. economy. At the conclusion of the Federal Open Market Committee meeting on Wednesday, the Fed announced that it would leave policy rates unchanged with the Fed funds target rate at a range of zero to 0.25 percent.
The Fed funds rate is the amount of interest banks pay one another when one bank has a shortfall of overnight reserves. By raising or lowering the funds rate, the Fed is essentially determining short-term interest rates.
Two things the Fed looks at closely to determine its monetary policy is inflation, as measured by the Core Consumer Price Index and jobs. For May, the core CPI came in above expectations at 0.3 percent, and up 1.9 percent over the past year. Recent labor reports indicate that although the labor market is improving, it’s not robust.
As a result, the Fed announced on Wednesday that the taper remains on schedule with another $10 billion cut to bond purchases, down to $35 billion per month, starting in July. But this month, it was what the Fed said that made the difference, not what they did, as they “reaffirmed [their]view that a highly accommodative stance of monetary policy remains appropriate.”
As to how long they would keep interest rates low, the Fed only indicated that it would “assess [the]progress … towards its objective of maximum employment and 2 percent inflation.”
In other words, the Fed is keeping interest rates low for an unspecified period, which some speculate to be mid-2015. This was interpreted as a win for both the bond and the stock markets for now, with both reacting favorably to the news.
Bonds have generally flattened out over the past two weeks with prices trading in a narrow range. Lower-quality convertible and high-yield (junk) bonds lead the bond market this past week with the Barclays U.S. Convertible Bond index gaining 1.29 percent and the Barclays High Yield Very Liquid index rising 0.43 percent over the same period.
This article was written byLaif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH). This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.